The recession which occurred in the early 1980's was the most severe
and the most significant in terms of economic policy of the post-World War II
recessions. There is probably more nonsense on the Internet concerning this recession
than for any of the other
recessions. There are people who probably consider themselves
intellectuals writing about
this recession as
The Reagan Recession, thus revealing that their partisan politics is a far greater
element of their mental makeup
than their allegiance to the truth.
But back to the recession of 1980-82.

The detailed statistics are important for this recession because it differed from the
others in the time pattern.
Below is the graph of the levels of quarterly real Gross Domestic Product (GDP) levels,
seasonally adjusted and in billions of chained 2000 dollars.

As can be seen in the above graph, the real GDP from 1980 onward was fluctuating up and down and on
average not trending in either direction. It is perhaps best to refer to this
condition as an economic malaise
rather than a recession because the economy was in difficulty more than a year before it
was officially an economic recession.

Below the statistics on the unemployment rate
will be presented, but the key variable of concern is investment purchases. History demonstrated
how important this variable is.
The immediate cause of the Great Depression of the 1930's was the catastrophic collapse of
investment purchases. There were prior causes, such as the real interest rate stemming from
restrictive monetary policy, but it is in investment purchases that these factors have
their effect. The graph below shows what was happening to investment purchases in
1979 through 1982.

This was the picture of investment conditions seen by economists and politicians
in 1982. It was not a comforting picture. The profile for mid-1981 to 1982 was especially distrubing.
It is the classic picture of a catastrophic collapse in progress.

The Statistical Details

Having shown the situation concerning investment it is now appropriate to review the
other statistics in detail.

Below
are the figures from the Bureau of Economic Analysis of the U.S. Department of Commerce
for quarterly real Gross Domestic Product (GDP) levels, seasonally adjusted and in billions of chained 2000 dollars.

Quarter

GDP

1978I

4830.8

1978II

5021.2

1978III

5070.7

1978IV

5137.4

1979I

5147.4

1979II

5152.3

1979III

5189.4

1979IV

5204.7

1980I

5221.3

1980II

5115.9

1980III

5107.4

1980IV

5202.1

1981I

5307.5

1981II

5266.1

1981III

5329.8

1981IV

5263.4

1982I

5177.1

1982II

5204.9

1982III

5185.2

1982IV

5189.8

1983I

5253.8

1983II

5372.3

1983III

5478.4

1983IV

5590.5

What the above GDP statistics show is that prior to 1979 the GDP had been growing by about fifty to a hundred
billion dollars per quarter. In 1979 the growth continues but at a slower rate, about thirty billion per quarter.
Then after the second quarter of 1980 there is an actual fall in GDP of about five billion and then another fall of nine
billion in the next quarter. The economy then recovers in the fourth quarter of 1980 and adds a hundred billion and another
hundred billion in the first quarter of 1981. The economy then falls in the second quarter only to rise in the third and
fall in the fourth. The erratic pattern continues in 1982 but in 1983 the economy commences to grow again.

Only part of the period would fit the notion of recession as a period of decline in GDP
and even less of it would fit the
strict definition of a recession as a period in which the GDP declined for two quarters or more. But clearly the whole
period of 1980-82 is one of an economic malaise and represents an episode of economic difficulty.

Although recessions are defined in terms of output (GDP) they are felt in terms of the unemployment rate.
Here are the unemployment statistics from the Bureau of Labor Statistics of the U.S. Department of Labor.

U.S. Unemployment Rates Month-by-Month for the Period 1978-1984

Year

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

1978

6.4

6.3

6.3

6.1

6.0

5.9

6.2

5.9

6.0

5.8

5.9

6.0

1979

5.9

5.9

5.8

5.8

5.6

5.7

5.7

6.0

5.9

6.0

5.9

6.0

1980

6.3

6.3

6.3

6.9

7.5

7.6

7.8

7.7

7.5

7.5

7.5

7.2

1981

7.5

7.4

7.4

7.2

7.5

7.5

7.2

7.4

7.6

7.9

8.3

8.5

1982

8.6

8.9

9.0

9.3

9.4

9.6

9.8

9.8

10.1

10.4

10.8

10.8

1983

10.4

10.4

10.3

10.2

10.1

10.1

9.4

9.5

9.2

8.8

8.5

8.3

1984

8.0

7.8

7.8

7.7

7.4

7.2

7.5

7.5

7.3

7.4

7.2

7.3

Several things are clear from the above statistics. First there was a perceptible rise in the unemployment rate in 1980. Second the unemployment rate rose as the
period of no growth in output persisted while the labor force grew. Third the peak unemplyment rates persisted after the
economy began to grow again in 1983 because of the backlog of unemployed workers that had accumulated during the period of
no growth. Fourth, and perhaps most important, after the recovery of growth the unemployment rate stayed at a higher level
than it had been at before the recession.

So far there has been no mention of the cause of the recession or malaise
or whatever one wants to call it. The cause clearly
was Paul Volcker's tight money policy which the Fed carried out to kill the chronic
inflation that had developed in the U.S.
economy during the 1970's. To show this one needs the statistics on the nominal interest rate, the rate of inflation and the
real interest rate. The real interest rate is the key variable because it determines the
level of investment. However, the level of
investment is an accumulation of work on past inititated investment projects as well
as the current ones so the level of investment has
a lagged response to the real interest rate.

A subsidiary issue is the impact of the Reagan administration's fiscal policy. Some
taxes were cut, government expenditures
in some fields were also cut and the net impact has to be evaluated. There were record high
levels of deficits, but macroeconomic analysis
indicates that governmental actions attempting to stimulate the economy will not be
effective unless there are deficits.

There was also a trade deficit that worried politicians. The trade deficit was an effect
of the high value of the dollar relative to
other currencies and this in turn was the result of the high real interest rates in the U.S.
compared to other countries.

(To be continued.)

Investment

The key variable affected by the high real interest rates was the level of investment
purchases. The statistics shown below show that investment purchases started to drop in
the third quarter of 1979, the quarter in which the policy of more severe constraint on
monetary growth was announced, and continued downward to the third quarter of 1980. From
then there was a partial recovery until the third quarter of 1981. Thereafter investment
purchases turned downward and continuted downward until the fourth quarter of 1982. By that
quarter investment purchases were off the previous peak of the second quarter of 1979 by
almost $61 billion. Had there been no compensating increases in the other components of aggregate
demand the GDP would have been down almost $134 billion. This would have led to an unemployment
rate of about 10.4 percent instead of the 8 percent rate that prevailed.

Gross Private Domestic Investmentin the U.S., 1979-1984

Quarter

InvestmentPurchases(Billions $1972)

1979I

237.7

1979II

238.7

1979III

232.6

1979IV

221.5

1980I

218.3

1980II

200.5

1980III

195.3

1980IV

200.5

1981I

211.6

1981II

219.7

1981III

221.5

1981IV

207.1

1982I

204.7

1982II

200.4

1982III

194.3

1982IV

177.8

1983I

191.3

1983II

212.6

1983III

230.6

1983IV

249.5

1984I

285.5

1984II

283.9

1984III

300.2

1984IV

289.1

Source: Economic Reports of the President, 1981,1983 & 1984.

Had there been no
compensating increases in the other components of aggregate demand the levels of investment
and GDP would have continued downward and there would have been a full blown depression.
But there were compensating changes. The most publicized was the Reagan Tax Cut. There
were cuts in some fields of Federal government purchases but increases, notably in defense,
in others.

The tax cut was
justified in terms of Supply-side Economics but equally well could have been justified
in terms of demand-side stimulation of the economy. The increase in government purchases
along with the tax cut led one economist to characterized the economic
policy of the Reagan administration as being "Keynesianism on steroids." Regardless of how
the policies were publicized and characterized the end result is that they kept the
anti-inflation policy of the Volcker Fed from recreating the conditions of 1929-1930
when the Fed precipitated the Great Depression. For more on the role of Fed policies
in creating the Great Depression see Depression Money.

Although the statistics on the recovery of investment purchases were presented above
the numbers do not have the impact of a graph in showing how investment purchases
recovered after the stimulation of the tax cut and net increases in government purchases.

It is to be noted that the deficits of the Federal Government did not "crowd out"
private investment. On the contrary, the expectations of economic recovery and growth
induced higher levels of investment purchases. In other words, private borrowing was
enticed in. Where did the funds come from for businesses to borrow. They came
from the increased savings generated by the recovery of the economy. It is also to be
noted that the increased deficits of the Federal government did not lead to increased
inflation. On the contrary during the time of the increased deficits the chronic
inflation of the 1970's collapsed and did not re-emerge.

(To be continued.)

For material on the other recessions in the U.S. and elsewhere see Recessions.